FTSE 100 defined deficit (DB) pension schemes have increased their asset allocation to bonds from an average of 55% to 60% over the year to 31 March as trust in liability driven investments (LDI) strategies gains momentum, according to research from JLT Employee Benefits. Six years ago, the average bond allocation was only 45%.
The FTSE 100 and their pension disclosures quarterly report estimates that the total deficit in FTSE 100 pension schemes had reached £89 billion at 31 March 2015, a deterioration of £30 billion from 12 months ago. Meanwhile, their total disclosed pension liabilities rose from £557 billion to £615 billion and sponsor contributions fell from £14.6 billion to £13.7 billion.
There are a significant number of FTSE 100 companies for which the pension scheme represents a material risk to the business, with six FTSE 100 companies having total disclosed pension liabilities greater than their equity market value.
For BAE Systems, International Airlines Group, RSA and Royal Bank of Scotland, total disclosed pension liabilities are almost double their equity market value.
Top 10 FTSE 100 companies with the most significant pension scheme liabilities:
|| Equity Market Value* £m
|| Surplus/(Deficit) as a % of Equity Market Value
|| Liabilities as a % of Equity Market Value
| BAE Systems
| International Airlines Group
| Royal Bank of Scotland
| Marks & Spencer
| Morrison Supermarkets
| Smiths Group
* as at 31 March 2015
** These companies' pension schemes have purchased contracts, which insure part of their liabilities; the figures in italics represent the impact of the liabilities without these insured sections.
Charles Cowling, Director, JLT Employee Benefits, comments: “The logic for matching assets to liabilities is gradually gaining acceptance among pension schemes and their sponsors, helped by a number of very successful LDI implementations over the last few years, which led to much better outcomes than alternative strategies. Bonds, and LDI strategies in particular, have outperformed equities in the last year or so, which has naturally led to an increase in bond holdings. As LDI becomes more of a norm, so bond allocations will increase. It is possible that average bond holdings could be up to 70% within 5 years, and up to 90% within 10 years.
“Higher bond allocation is also underpinned by the trend in DB scheme closure to new members and new benefits, as this affects trustees’ investment time horizon. We believe that the majority of FTSE100 companies will have ceased all DB pension provision within 12 months - Tesco is just the latest major company to announce the closure of its DB pension scheme. The end of contracting-out next year, recent tax changes and the soaring costs of DB have all accelerated scheme closures and encouraged changes to investment strategies.
“Most companies and pension schemes wish to reduce investment risk (i.e. switch to bonds) more than they have, particularly in light of the Pensions Regulator’s heightened focus on integrated funding, investment, and employer covenant, risk strategies. Often, the only thing that stops them is a large deficit and/or a lack of funding commitment, which spurs them to keep investment risk in the hope for higher returns. As and when deficits eventually reduce, the barriers to switching into bonds will largely disappear.”
- ENDS -
Notes to Editors
+44 (0)20 7903 0633
+44 (0)20 7903 0674&
About JLT Employee Benefits
JLT Employee Benefits is one of the UK's leading employee benefit providers offering a wide range of benefit and pension services, including administration, actuarial and pension consultancy, investment, Self Invested Personal Pensions (SIPPs) and Small Self Administered Schemes (SSASs) administration, flexible benefits, healthcare, benefit communication and financial education.
JLT Employee Benefits employs over 2,200 professionals throughout the UK and in 2013 had revenues of £172m in UK & Ireland.
Pensions and employee benefits companies within the JLT Employee Benefits group of companies include: JLT Benefit Solutions Ltd, Profund Solutions Limited, JLT Wealth Management Limited, JLT Investment Management Limited and Independent Trustee Services Limited. JLT Employee Benefits is part of Jardine Lloyd Thompson Group plc.
About Jardine Lloyd Thompson Group plc
Jardine Lloyd Thompson is one of the world's largest providers of insurance and employee benefits related advice, brokerage and associated services. JLT's client proposition is built upon its deep specialist knowledge, client advocacy, tailored advice and service excellence.
JLT is quoted on the London Stock Exchange and owns offices in 39 territories with some 9,000 employees. Supported by the JLT International Network, it offers risk management and employee benefit solutions in 135 countries.